Calian Reports First Quarter Results

OTTAWA, ONTARIO--(Marketwire - Feb. 9, 2011) -

(All amounts in this release are in Canadian Dollars)

Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the first quarter ended December 31, 2010. Revenues for the quarter were $53.3 million, a 2% increase from the $52.1 million reported in the same quarter of the previous year. Net earnings were $3.1 million or $0.41 per share basic and diluted, compared to $3.4 million or $0.44 per share basic and diluted in the same quarter of the previous year. 

"Results for the quarter were in line with management expectations. Both divisions posted revenues that were steady when compared to the first quarter of the prior year. Our BTS division realized a modest improvement in revenues year over year as customer utilization on long-term contracts remains firm. More importantly, we are starting to see an improved landscape for our short-term staffing group. Revenues in the SED division were buoyed by the high level of activity on the ESA deep space antenna in Argentina where site activities are progressing as planned. Manufacturing related revenues decreased during the quarter compared to prior year, primarily due to variability in customer demand patterns", stated Ray Basler, President and CEO.

"As expected, overall margins have dipped slightly from the same quarter last year, but have remained in line with those achieved in the previous quarter. We continue to see competitive pressures on new opportunities and the strength of the Canadian dollar presents additional challenges for international pursuits. However, we are confident in the quality and value of our service offerings; key components in winning new business" continued Basler.

"Based on our earnings to date, our future outlook and our healthy cash position we have increased our quarterly dividend to $0.25 per share; an increase of over 13%. Our annualized dividend of $1.00 per share represents a yield in excess of 5% relative to recent share prices. We continue to maintain a strong balance sheet that provides not only the basis for future growth and the ability to weather any future downturns, but also the added customer confidence in our ability to execute" continued Basler.

We believe that our key markets will remain strong and we are expecting exciting opportunities to materialize in the future. At the same time, we are cognizant of the potential impact of government cost cutting initiatives and delays in customer spending decisions that could alter our anticipated revenue profile. Consequently, revenues ultimately realized will be dependent on the extent and timing of future contract awards and customer utilization patterns. At this juncture, we expect revenues for 2011 to remain in the range of $215 million to $235 million and net earnings per share in the range of $1.50 to $1.80 per share.

About Calian

Calian sells technology services to industry and government in Canada and around the world. Calian provides customers with ready access to an exceptional team of engineers, telecommunications and technology professionals, health care professionals and other highly qualified staff. The Business and Technology Services Division augments customer workforces with flexible short and long-term placements, recruitment and outsourcing of engineering, health care professionals and other skilled professionals. The Systems Engineering Division plans, designs and implements solutions for many of the world's space agencies and leading communications satellite manufacturers and operators, as well as providing contract manufacturing services for customers in North America.

For further information, please visit our website at www.calian.com, or contact us at ir@calian.com.

DISCLAIMER

Certain information included in this press release is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, and including currency exchange rate fluctuations; and the impact of consolidations in the business services industry. For additional information with respect to certain of these and other factors, please see the Company's most recent annual report and other reports filed by Calian with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.

CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(Canadian dollars in thousands, except per share data)
			Three months ended December 31
			2010				2009
Revenues			$	53,260			$	52,108
Cost of revenues				42,880				41,418
Gross profit				10,380				10,690
Selling and marketing				1,288				1,255
General and administration				3,924				3,905
Facilities				833				730
Stock option compensation				-				11
Depreciation and amortization				286				220
Earnings before other income, interest income and income tax expense				4,049				4,569
Unrealized gain on fair value of conversion options of investment (Note 6)				-				80
Interest income (Note 7)				231				189
Earnings before income tax expense				4,280				4,838
Income tax expense – current				1,032				1,270
Income tax expense – future				110				125
				1,142				1,395
NET EARNINGS			$	3,138			$	3,443
Retained earnings, beginning of period				39,769				42,692
Adjustment to opening retained earnings for a change in accounting policy (Note 2)				-				(367	)
Excess of purchase price over stated capital on repurchase of shares (Note 8)				(282	)			(793	)
Dividends				(1,698	)			(9,129	)
Retained earnings, end of period			$	40,927			$	35,846
Net earnings per share: (Note 9)
	Basic		$	0.41			$	0.44
	Diluted		$	0.41			$	0.44
Weighted average number of shares: (Note 9)
	Basic			7,710,862				7,766,170
	Diluted			7,735,177				7,796,452

CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Canadian dollars in thousands)
			December 31, 2010			September 30, 2010
ASSETS
CURRENT ASSETS						(Note 2)
	Cash		$	26,442		$	29,055
	Accounts receivable			33,755			33,954
	Work in process			2,276			3,576
	Prepaid expenses (Note 5)			3,880			6,329
	Future income taxes			387			696
	Derivative assets (Note 12)			393			158
	Investment (Note 6)			1,000			953
				68,133			74,721
INVESTMENT (Note 6)				2,577			2,464
EQUIPMENT				4,483			4,611
INTANGIBLE				509			543
GOODWILL				9,518			9,518
			$	85,220		$	91,857
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
	Accounts payable and accrued liabilities		$	11,578		$	17,024
	Unearned contract revenue			12,909			16,002
	Derivative liabilities (Note 12)			240			48
				24,727			33,074
CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY
	Share capital (Note 8)			18,798			18,689
	Contributed surplus (Note 8)			156			171
	Retained earnings (Note 2)			40,927			39,769
	Accumulated other comprehensive income			612			154
				60,493			58,783
			$	85,220		$	91,857

CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Canadian dollars in thousands)
			Three months ended December 31
			2010				2009
Net earnings			$	3,138			$	3,443
	Unrealized loss on translating financial statements of self-sustaining foreign operation, net of tax of nil (December 31, 2009 – nil)			(29	)			(25	)
	Change in deferred gain on derivatives designated as cash flow hedges, net of tax of $199 (December 31, 2009 – $143)			487				298
Other comprehensive income				458				273
Comprehensive income			$	3,596			$	3,716

CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME AND RETAINED EARNINGS
(Canadian dollars in thousands)
		December 31, 2010				September 30, 2010
Unrealized cumulative loss on translating financial statements of self-sustaining foreign operation, net of tax		$	(386	)		$	(357	)
Deferred gain on derivatives designated as cash flow hedges, net of tax			998				511
Accumulated other comprehensive income, end of period, net of tax			612				154
Retained earnings, end of period as adjusted (Note 2)			40,927				39,769
Accumulated other comprehensive income and retained earnings, end of period		$	41,539			$	39,923

CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Canadian dollars in thousands)
			Three months ended December 31
			2010				2009
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings			$	3,138			$	3,443
Items not affecting cash:
	Interest accreted on host contract component of investment (Note 7)			(160	)			(141	)
	Employee stock purchase plan and stock option compensation expense			15				23
	Depreciation and amortization			286				220
	Future income tax expense			110				125
	Unrealized gain on fair value of conversion options of investment (Note 6)			-				(80	)
				3,389				3,590
Change in non-cash working capital
	Accounts receivable			82				320
	Work in process			1,300				(793	)
	Prepaid expenses (Note 5)			2,449				(331	)
	Accounts payable and accrued liabilities			(4,701	)			(4,406	)
	Unearned contract revenue			(3,093	)			1,878
				(574	)			258
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
	Issuance of common shares			138				638
	Dividends			(1,698	)			(9,128	)
	Repurchase of shares (Note 8)			(326	)			(918	)
				(1,886	)			(9,408	)
CASH FLOWS USED IN INVESTING ACTIVITIES
	Equipment expenditures			(124	)			(265	)
				(124	)			(265	)
FOREIGN CURRENCY ADJUSTMENT				(29	)			(25	)
NET CASH OUTFLOW				(2,613	)			(9,440	)
CASH, BEGINNING OF PERIOD				29,055				43,662
CASH, END OF PERIOD			$	26,442			$	34,222

CALIAN TECHNOLOGIES LTD.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the periods ended December 31, 2010 and 2009

(Canadian dollars in thousands, except per share amounts)

(Unaudited)

1. ACCOUNTING POLICIES

These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. They do not include all of the information and notes required by generally accepted accounting principles for annual financial statements.

These interim consolidated financial statements have been prepared using the same accounting policies used in the preparation of the audited annual consolidated financial statements for the year ended September 30, 2010 with the exception of the application of the accounting policy described in Note 2. These interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements.

2. CHANGE IN ACCOUNTING POLICY

Effective October 1, 2010, the Company changed its accounting policy with regards to the recognition of warranty costs related to fixed price contracts. Previously a provision for warranty claims was established when revenue was recognized, based on the warranty terms and prior claim experience. To better align revenue recognized with the warranty obligations, warranty costs are now included in estimated total contract costs at the beginning of the project and flow through cost of revenues when a warranty claim is made. Revenue is recognized using the percentage completion method based on management's best estimate of the costs to complete each contract. This change in accounting policy is applied retroactively to October 1, 2009 with a reduction in the warranty provision of $3,715 (through accounts payable and accrued liabilities), an increase in unearned contract revenue of $4,239, a decrease in taxes payable of $157 (through accounts payable and accrued liabilities) and a reduction in opening retained earnings of $367. The impact on the net income for fiscal 2010 and the quarter ended December 31, 2010 is not material.

3. ACCOUNTING ESTIMATES

For the periods ended December 31, 2010 and 2009, no material changes in estimates have been made.

4. SEASONALITY

The Company's revenues and earnings have historically been subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays.

5. PREPAID EXPENSES

	December 31	September 30
	2010	2010
Prepaid operating expenses	$ 968	$ 705
Milestone advance to subcontractor	2,912	5,624
	$ 3,880	$ 6,329

6. INVESTMENT

On July 11, 2006, the Company invested $3,623 in Med-Emerg International Inc. (Med-Emerg) in the form of convertible preferred shares which included $116 of acquisition costs. On January 20, 2009, Med-Emerg announced that it successfully merged with AIM Health Group Inc. (AIM) in an all-stock transaction. At that time, Calian surrendered its preferred shares in Med-Emerg in exchange for a secured convertible debenture of AIM with a face value of $3,897. The share exchange resulted in a loss on exchange of $125.

The non-interest bearing debenture is convertible into 6,831,372 common shares of AIM at the Company's option. AIM is also entitled to cause the debenture to be converted into common shares when in any given 6-month period, trading volumes of AIM common shares exceed 1,089,642 shares and the weighted average share price is at least $0.57. Conversion is limited to 50% of the debenture in any 6-month period. On a fully converted basis, this investment represents a 6% interest based on the current number of common shares outstanding. The debenture is subordinated to secured creditors of record on January 20, 2009 and any bank indebtedness. The debenture is due to be redeemed in two instalments; $1,000 payable in cash on January 1, 2011 and the remaining $2,897 payable on July 11, 2011 in cash or AIM common shares at the option of AIM based on the then fair market value of the common shares. In January 2011, the Company received the payment of $1,000.

Carrying value of investment:

Med-Emerg investment, at cost	$	3,623
Med-Emerg cumulative unrealized loss on conversion options		(1,878	)
Med-Emerg cumulative interest accretion on host contract		897
Med-Emerg fair value of investment on January 20, 2009, prior to exchange	$	2,642
Loss on share exchange		(125	)
AIM investment, at cost	$	2,517
AIM cumulative unrealized loss on conversion options		(17	)
AIM cumulative interest accretion on host contract		1,077
Carrying value of investment at December 31, 2010	$	3,577
Short-term		1,000
Long-term	$	2,577

The Company's investment is considered a hybrid instrument as it includes rights of conversion to common shares. The conversion options are considered to be embedded derivatives to be separated and valued independent of the underlying host contract. The conversion options are measured at fair value with changes in fair value recorded in net income. AIM shares are traded on the TSX Venture Exchange and currently trade in limited volume. With only 6 months remaining on the conversion feature, the fair value of the conversion options is estimated at NIL.

7. INTEREST INCOME

	Three months ended  December 31
	2010	2009
Interest earned on cash balances	$ 71	$ 48
Accreted interest on host contract component of investment	160	141
Interest income	$ 231	$ 189

8. SHARE CAPITAL

Share repurchase

During the first quarter ending December 31, 2010 (2009), the Company acquired 17,800 (53,170) of its outstanding common shares at an average price of $18.25 ($17.24) per share for a total of $326 ($918) including related expenses, through normal course issuer bids in place during the period. The excess of the purchase price over the stated capital of the shares was charged to retained earnings. 

Share issue

During the first quarter ending December 31, 2010 (2009), the Company issued 15,200 (62,238) shares as a result of option exercises. Cash proceeds from exercise were $138 ($638). In addition, $15 ($80) was reclassified from contributed surplus to common shares.

9. NET EARNINGS PER SHARE

The diluted weighted average number of shares has been calculated as follows:

Three months ended  December 31
	2010	2009
Weighted average number of shares – basic	7,710,862	7,766,170
Addition to reflect the dilutive effect of employee stock options	24,315	30,282
Weighted average number of shares – diluted	7,735,177	7,796,452

Options that are anti-dilutive because the exercise price was greater than the average market price of the common shares are not included in the computation of diluted earnings per share. For the periods December 30, 2010 and 2009, no options were excluded from the above computation of diluted weighted average number of shares.

10. CONTINGENCIES

In the normal course of business, the Company is party to employee related claims. The potential outcomes related to existing matters faced by the Company are not determinable at this time. The Company intends to defend these actions, and management believes that the resolution of these matters will not have a material adverse effect on the Company's financial condition.

11. SEGMENTED INFORMATION

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, regarding how to allocate resources and assess performance. The Company's chief operating decision maker is the Chief Executive Officer. The Company operates in two reportable segments described below, defined by their primary type of service offering, namely Systems Engineering and Business and Technology Services.

• Systems Engineering involves planning, designing and implementing solutions that meet a customer's specific business and technical needs, primarily in the satellite communications sector.

• Business and Technology Services involves both short long-term and placements of personnel to augment customers' workforces (Staffing) as well as the long-term management of projects, facilities and customer business processes (Outsourcing).

The Company evaluates performance and allocates resources based on earnings before other expense, interest income and income taxes. The accounting policies of the segments are the same as those described in the significant accounting policies note in the audited annual consolidated financial statements.

Three months ended December 31, 2010
	Systems Engineering	Business and Technology Services	Corporate		Total
Revenues	$ 15,171	$ 38,089	$ -		$ 53,260
Earnings before interest income and income tax expense	2,218	2,452	(621	)	4,049
Interest income (Note 7)					231
Income tax expense					(1,142	)
Net earnings					$ 3,138
Total assets other than cash and goodwill	$ 13,180	$ 32,252	$ 3,828		$ 49,260
Goodwill	-	9,518	-		9,518
Cash	-	-	26,442		26,442
Total assets					$ 85,220
Equipment and intangible expenditures	$ 110	$ 14	$ -		$ 124

Three months ended December 31, 2009
	Systems Engineering	Business and Technology Services	Corporate		Total
Revenues	$ 14,977	$ 37,131	$ -		$ 52,108
Earnings before other income, interest income and income tax expense	2,399	2,806	(636	)	4,569
Unrealized gain on fair value of conversion options of long-term investment (Note 6)					80
Interest income (Note 7)					189
Income tax expense					(1,395	)
Net earnings					$ 3,443

Year ended September 30, 2010
Total assets other than cash and goodwill	$ 16,507	$ 33,287	$ 3,490	$ 53,284
Goodwill	-	9,518	-	9,518
Cash	-	-	29,055	29,055
Total assets	$ 16,507	$ 42,805	$ 32,545	$ 91,857
Equipment and intangible expenditures	$ 668	$ 710	$ -	$ 1,378

12. HEDGING

Foreign currency risk related to contracts

The Company is exposed to foreign currency fluctuations on its cash balance, accounts receivable, accounts payable and future cash flows related to contracts denominated in a foreign currency. Future cash flows will be realized over the life of the contracts. The Company utilizes derivative financial instruments, principally in the form of forward exchange contracts, in the management of its foreign currency exposures. The Company's objective is to manage and control exposures and secure the Company's profitability on existing contracts and therefore, the Company's policy is to hedge 100% of its foreign currency exposure excluding its exposure arising from the Company's US subsidiary. The Company does not utilize derivative financial instruments for trading or speculative purposes. The Company applies hedge accounting when appropriate documentation and effectiveness criteria are met.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm contractually related commitments on projects. 

The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Hedge ineffectiveness has historically been insignificant.

The forward foreign exchange contracts primarily require the Company to purchase or sell certain foreign currencies with or for Canadian dollars at contractual rates. At December 31, 2010, the Company had the following forward foreign exchange contracts:

Type	Notional	Currency	Maturity	Equivalent Cdn. Dollars		Fair Value  December 31, 2010
SELL	19,315	USD	January 2011	$ 19,303		$ 93
SELL	1,000	USD	September 2015	1,057		62
SELL	1,000	USD	September 2016	1,057		62
SELL	1,000	USD	September 2017	1,057		62
BUY	6,097	EURO	January 2011	8,008		113
BUY	183	GPB	January 2011	283		1
Derivative assets						$ 393
BUY	4,335	USD	January 2011	$ 4,332		$ 21
SELL	11,891	EURO	January 2011	15,619		219
Derivative liabilities						$ 240

A 10% strengthening (weakening) of the Canadian dollar against the following currency at December 31, 2010 would have increased (decreased) other comprehensive income as related to the forward foreign exchange contracts by the amounts shown below.

	December 31, 2010
USD	$ 1,530
EURO	1,883
GBP	(29)
	$ 3,384

Management Discussion and Analysis – December 31, 2010:

(Canadian dollars in thousands, except per share data)

RESULTS OF OPERATIONS

Revenues:

For the first quarter 2011, revenues were $53,260 compared to $52,108 reported for the same period in 2010 representing a 2% increase from the prior year. 

Systems Engineering's (SED) revenues were $15,171 in the quarter representing an increase of 1% from the $14,977 recorded last year in the same quarter. Revenues are consistent with the level of activities generated in the same quarter of the previous year. Due to the project nature of its business, the SED division is susceptible to significant variation in volumes of activity from period to period.

Business and Technology Services (BTS) revenues were $38,089 in the quarter representing an increase of 3% for the quarter compared to the $37,131 achieved for the same period of last year. During the quarter BTS experienced steady activity on all of its contracts with some modest but encouraging increases within its private sector business. 

Management expects that the marketplace over the next year will continue to be very competitive. The market conditions for SED are expected to be positive and should present new opportunities, although the related timing is somewhat uncertain. Current BTS backlog is expected to provide a solid level of activity on existing contracts and new opportunities are expected to be available. However, the timing of future contract awards and customer demand will ultimately determine revenues for the next year.

Gross margin:

Gross margin was 19.5% in the first quarter of 2011, compared to the 20.5% reported in the first quarter a year ago. The consolidated gross margin for the first quarter 2011 was in line with expectations and reflects a continued downward pressure on margins.

Gross margin in Systems Engineering was 25.0% this quarter compared to 25.6% in the first quarter of 2010 in line with traditional levels for SED.

Gross margin in Business and Technology Services was 17.3% compared to the 18.5% reported in the first quarter of 2010. Gross margin for the first quarter of last year was better than usual as a result of an optimum revenue mix for that quarter whereas, current quarter margins in BTS are more in line with recent trends. Gross margin for this first quarter 2011 is reflective of the current mix of business and therefore is representative of expected margins in the near term.

Because of the significant difference in gross margin between each of the two divisions, the overall gross margin of the Company is dependent on the relative level of revenue generated from each division. Management will continue to focus on execution in order to maximize margins. Increased competition continues to put downward pressure on margins in both divisions. In addition, the continued volatility of the Canadian dollar coupled with lower utilization levels in the short term are expected to further dampen margins in the SED division.

Operating expenses:

Selling and marketing, general and administration and facilities totalled $6,045 or 11.3% of revenues in the first quarter of 2011 compared to $5,890 or 11.3% of revenues reported in the first quarter of 2010. Operating expenses are stable and in line with the overall level of revenues.

Interest income:

Interest income for the first quarter of 2011 was $231 compared to $189 in 2010. Interest income is comprised of interest earned on the Company's cash balances and accrued interest related to the investment in AIM Health Group Inc. (AIM). Interest income increased as a result of increased interest rates.

Unrealized gain on fair value of conversion options of investment:

For the quarter ended December 31, 2009 the Company recorded a gain of $80 relating to the fair value of conversion options of investment. The reported unrealized gain is a reflection of the movement in quoted market prices of AIM shares and the remaining term of the related conversion privilege. With only 9 months remaining on the conversion feature at September 30, 2010, the fair value of the conversion options was estimated at NIL with no changes reported at December 31, 2010. Therefore no gain or loss was recorded this quarter.

Income taxes:

The provision for income taxes for the first quarter of 2011 was $1,142 or 26.7 % of earnings before tax compared to $1,395 in 2010 or 28.8% of earnings before tax. The decrease in the realized tax rate is the result of a continued decrease in prescribed federal and provincial tax rates. The effective tax rate for 2011, prior to considering the impact of non-taxable transactions, is expected to be approximately 28%.

Net earnings:

As a result of the foregoing, in the first quarter of 2011 the Company recorded net earnings of $3,138 or $0.41 per share basic and diluted, compared to $3,443 or $0.44 per share basic and diluted in the same quarter of the prior year. 

BACKLOG

The Company's backlog at December 31, 2010 was $897 million with terms extending to fiscal 2018. This compares to $924 million reported at September 30, 2010. Contracted Backlog represents maximum potential revenues remaining to be earned on signed contracts, whereas Option Renewals represent customers' options to further extend existing contracts under similar terms and conditions.

Most fee for service contracts provide the customer with the ability to adjust the timing and level of effort throughout the contract life and as such the amount actually realized could be materially different from the original contract value. The following table represents management's best estimate of the backlog realization for 2011, 2012 and beyond based on management's current visibility into customers' existing requirements.

Management's estimate of the realizable portion (current utilization rates and known customer requirements) is less than the total value of signed contracts and related options by approximately $241 million. The majority of this amount relates to the health services support contract. The Company's policy is to reduce the reported contractual backlog once it receives confirmation from the customer that indicates the utilization of the full contract value may not materialize.

(dollars in millions)	Fiscal 2011	Fiscal 2012	Beyond 2012	Estimated realizable portion of Backlog	Excess over estimated realizable portion	TOTAL
Contracted Backlog	$ 134	$ 92	$ 70	$ 296	$ 114	$ 410
Option Renewals	6	51	304	361	126	487
TOTAL	$ 140	$ 143	$ 374	$ 657	$ 240	$ 897
Business and Technology Services	$ 105	$ 124	$ 358	$ 587	$ 240	$ 827
Systems Engineering	35	19	16	70	-	70
TOTAL	$ 140	$ 143	$ 374	$ 657	$ 240	$ 897

FINANCIAL CONDITION AND CASHFLOWS

Operating activities:

Cash outflows from operating activities for the quarter ending December 31, 2010 were $574 compared to cash inflows of $258 in the quarter ending December 31, 2009. This year's decrease is the result of lower earnings coupled with working capital fluctuations in line with the ebbs and flows of the business. The market for the Systems Engineering Division is characterized by contracts with billings tied to milestones achieved, which often results in significant working capital requirements. Conversely, given the nature of this business, it is sometimes possible to negotiate advance payments on contracts. Such advance payments give rise to unearned revenue that will be realized as revenue over the course of the contract. As at December 31, 2010, the Company's total unearned revenue amounted to $12,909. This compares to $16,002 at September 30, 2010, with the decrease primarily attributable to work progressing on the third deep space antenna contract for ESA.

Financing activities:

During the quarter, the Company paid quarterly dividends of $0.22 per share compared to 2009 when the Company paid $0.17 per share. The Company intends to continue with its quarterly dividend policy for the foreseeable future.

During the period ending December 31, 2010, the Company repurchased 17,800 common shares through its normal course issuer bid at an average price of $18.25 compared to the previous year when the Company repurchased 53,170 shares at an average price of $17.24.

Capital resources:

At December 31, 2010 the Company had a short-term credit facility of $10,000 with a Canadian chartered bank that bears interest at prime and is secured by assets of the Company. An amount of $612 was drawn to issue a letter of credit to meet customer contractual requirements. Management believes that Calian has sufficient cash resources to continue to finance its working capital requirements and pay a quarterly dividend.

ADOPTION OF NEW ACCOUNTING RULES AND IMPACT ON 2011 FINANCIAL RESULTS

Effective October 1, 2010, the Company changed its accounting policy with regards to the recognition of warranty costs related to fixed price contracts. Previously a provision for warranty claims was established when revenue was recognized, based on the warranty terms and prior claim experience. To better align revenue recognized with the warranty obligations, warranty costs are now included in estimated total contract costs at the beginning of the project and flow through cost of revenues when a warranty claim is made. Revenue is recognized using the percentage completion method based on management's best estimate of the costs to complete each contract. This change in accounting policy is applied retroactively to October 1, 2009 with a reduction in the warranty provision of $3,715 (through accounts payable and accrued liabilities), an increase in unearned contract revenue of $4,239, a decrease in taxes payable of $157 (through accounts payable and accrued liabilities) and a reduction in opening retained earnings of $367. The impact on the net income for fiscal 2010 and the quarter ended December 31, 2010 is not material.

SELECTED QUARTERLY FINANCIAL DATA

		Q1/11	Q4/10	Q3/10	Q2/10	Q1/10	Q4/09	Q3/09	Q2/09
Revenues		$ 53,260	$ 52,911	$ 57,565	$ 53,141	$ 52,108	$ 54,365	$ 57,845	$ 59,922
Net earnings		$ 3,138	$ 3,240	$ 3,845	$ 3,082	$ 3,443	$ 3,449	$ 4,483	$ 5,201
Net earnings per share
	Basic	$ 0.41	$ 0.42	$ 0.49	$ 0.40	$ 0.44	$ 0.45	$ 0.58	$ 0.67
	Diluted	$ 0.41	$ 0.42	$ 0.49	$ 0.40	$ 0.44	$ 0.44	$ 0.58	$ 0.67

SEASONALITY

The Company's operations are subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays. Typically the Company's first and last quarter will be negatively impacted as a result of the Christmas season and summer vacation period. During these periods, the Company can only invoice for work performed and is also required to pay for statutory holidays. This results in reduced levels of revenues and in a drop in gross margins. This seasonality may not be apparent in the overall results of the Company depending on the impact of the realized sales mix of its various projects.

OUTLOOK

Management believes the Company is well positioned for sustained growth. The Company operates in markets that will continue to require the services that the Company offers. To further assure itself of a stable source of revenues, the Company will focus on increasing the percentage of its revenues derived from recurring business while pursuing new business in adjacent markets. The Systems Engineering Division has been working within a stable satellite sector for the last two years and the division is expecting new opportunities to arise as systems adopting the latest technologies will be required by customers to maintain and improve their service offerings. Management is also confident that systems such as MSTAR will continue to be in demand in the security and surveillance market although it cannot predict the timing and extent of future orders. Custom manufacturing activity levels will continue to be directly dependent upon SED's customers' requirements. The continued volatility of the Canadian dollar could impact the Systems Engineering Division's competitiveness when bidding against foreign competition on projects denominated in foreign currencies.

The Business and Technology Services Division's services are adaptable to many different markets. Currently, its strength lies in providing program management and delivery services to the Department of National Defence. Management believes that this department and many others within the federal government will continue to require more support services from private enterprises to supplement their current workforce. Management believes that the types of service the division offers will continue to be attractive to government agencies going forward and the division continues to assess how it can service new markets and increase new opportunities available to the division.

GUIDANCE

We believe that our key markets will remain strong and we are expecting exciting opportunities to materialize in the future. At the same time, we are cognizant of the potential impact of government cost cutting initiatives and overseas deployment reductions in the military. In addition, with unsettled commercial markets, we are seeing delays in spending decisions that have resulted in alterations to our anticipated revenue profiles. Consequently, revenues ultimately realized will be dependent on the extent and timing of future contract awards. At this juncture, we expect revenues for 2011 to remain in the range of $215 million to $235 million and net earnings per share in the range of $1.50 to $1.80 per share.

INTERNATIONAL FINANCIAL REPORTING STANDARDS

The Canadian Accounting Standards Board has announced that Canadian publicly accountable enterprises will be required to report under International Financial Reporting Standards (IFRS) as replacement guidance for the Canadian generally accepted accounting principles (Canadian GAAP) effective for fiscal years beginning after January 1, 2010. Therefore, the Company will adopt IFRS as the basis of preparation for its interim and annual financial statements for periods beginning on October 1, 2011 with a transition date of October 1, 2010 to allow for comparative financial information. IFRS uses a conceptual framework similar to current Canadian GAAP, but there are significant differences in recognition, measurement and disclosures. In addition, it is expected that IFRS in effect at the time of reporting the Company's first IFRS financial statements will evolve from current IFRS and may result in additional differences.

In order to prepare for the conversion to IFRS, the Company has developed an IFRS changeover plan. This plan addresses key elements of the Company's conversion to IFRS including:

• Accounting policy changes and financial reporting requirements;
• Education and training requirements;
• Impacts on business activities and on Information technology and data systems;
• Internal control over financial reporting; and
• Disclosure controls and procedures.

We have also established a formal governance structure for the conversion to IFRS. The initiative is lead by the Chief Financial Officer who reports regularly to the Chief Executive Officer. The Chief Financial Officer also reports quarterly to the Audit Committee of the Board of Directors on the status of the project and the implications of the changeover to IFRS.

During 2010, the following activities were performed:

• A detailed assessment was substantially completed for all key standards and significant accounting policy choices including IFRS 1 elective exemption choices using IFRS standards in effect on date of transition;
• The creation of a duplicate IFRS compliant environment to track all adjusting IFRS entries for the Company's opening balance sheet and throughout the Company's dual reporting period of October 1, 2010 to September 30, 2011;
• A detailed assessment was performed of required changes to internal controls. Management concluded that internal controls applicable to the Company's reporting process under Canadian GAAP are fundamentally the same as those required in the Company's IFRS reporting environment;
• A detailed assessment was performed and minimal changes to disclosure controls and procedures were identified. Disclosure controls and procedures have been updated to include all data required for financial statements disclosures under IFRS;
• A detailed assessment has been completed of the impact of IFRS on key performance indicators and business activities such as compensation arrangements, hedging activities and risk management practices.
• A detailed assessment was performed of required changes to internal controls, systems, processes and documentation. With the exception of adjusting the Company's hedging documentation to reflect IFRS standard requirements, no significant changes were required;
• A complete IFRS financial statement model was built and reviewed by management and the board of directors;
• Data collection for the opening balance sheet is in progress; and
• Key finance employees responsible to carry out the IFRS conversion were provided with adequate training and resources throughout this process. The Company also held an IFRS information session with all members of the board of directors. The Audit Committee is also appraised quarterly on IFRS standards and policy choices available to the Company.

For 2011 the following activities are in progress:

• Monitor standards to be issued by the IASB and provide the related training on such. Assess the impact of new IASB standards on the Company's opening balance sheet and its financial position and results of operations throughout the conversion period;
• Complete the data collection and finalize the assessment of the impact of adopting IFRS. Data collection for each quarter in fiscal 2011 is intended to be performed shortly following the closing of each quarter under Canadian GAAP;
• Complete the necessary work required to quantify the impact of the changeover to IFRS on the Company's financial position and result of operations at date of transition and affecting the comparative year 2011 and the first reporting year 2012;
• Prepare fiscal 2011 quarterly financial statements under IFRS standards, in preparation for reporting comparative information in 2012; the Company's first year of reporting under IFRS. 

First-time adoption of IFRS:

IFRS 1 – First-Time Adoption of International Financial Reporting Standards generally requires that a first-time adopter apply IFRS accounting policies retrospectively to all periods presented in its first IFRS compliant financial statements. IFRS 1 also provides certain mandatory and optional exemptions to the full retrospective application. The most significant optional exemptions applicable to the Company are summarized on page 22 of the Company's Management Discussion and Analysis in the 2010 Annual Report. During the first quarter 2011, the Company has not identified any additional elections to be considered by management.

Expected areas of significance:

The Company's key changes in accounting policies required under IFRS standards are summarized on page 22 and 23 of the Company's Management Discussion and Analysis in the 2010 Annual Report. The differences identified in this document should not be regarded as an exhaustive list and other changes may result from the Company's conversion to IFRS. Furthermore, as a result of changes in circumstances, such as economic conditions or operations, and the inherent uncertainty from the use of assumptions, the actual impacts may be different from those presented. During the first quarter 2011, the Company did not identify any additional changes in accounting policy to be considered by management.

Many of the differences identified between IFRS and Canadian GAAP have now been quantified. We have not yet prepared a full set of annual financial statements under IFRS; therefore, amounts are unaudited. Based on the Company's work to date, we do not expect that the conversion to IFRS will result in a significant impact on the financial position or results of operations of the Company and believe that the areas of higher potential impact will be around overall presentation and disclosure requirements. However, our assessment of the impacts of certain potential differences will not be finalized until the Company has prepared a full set of annual financial statements under IFRS, The future impacts of converting to IFRS will depend on the particular circumstances prevailing in those years.

The International Accounting Standards Board (IASB) has a number of ongoing projects on its agenda. Management continues to monitor standards to be issued by the IASB, but we do not expect these standards to be mandatory for the Company's fiscal 2012 financial statements. The summary of key expected changes summarized on page 22 and 23 of the Company's Management Discussion and Analysis in the 2010 Annual Report was completed with the expectation that we will apply IFRS standards expected to be effective at the date of conversion. However, management will only make final decisions regarding early adoption of any new standards as they are issued by the IASB.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

During the most recent interim quarter ending December 31, 2010, there have been no changes in the design of the Company's internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

FORWARD-LOOKING STATEMENT

Certain information included in this management discussion and analysis is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, currency exchange rate fluctuations; and the impact of consolidations in the business services industry. For additional information with respect to certain of these and other factors, please see the Company's most recent annual report and other reports filed by the Company with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.

The foregoing discussion and analysis should be read in conjunction with the financial statements for the first quarter of 2011, and with the Management Discussion and Analysis in the 2010 annual report, including the section on risks and opportunities.